The Market Says Obamacare Is Here to Stay

by James Brumley | October 4, 2013 4:32 pm

The Market Says Obamacare Is Here to Stay

The advent of the Affordable Care Act wasn’t exactly news to traders when open enrollment began Tuesday. Investors have had three years to figure out which companies are the bill’s beneficiaries and which are the victims, so most Obamacare-driven trades were already in place.

Hospitals and managed care stocks[1], for instance, have found a steady stream of buyers for a while, now that a higher number of insured people will almost certainly keep primary caregivers busy. Meanwhile, medical device names have struggled in the shadow of the newly implemented medical device tax.

Yet, the Affordable Care Act might be in more jeopardy now than it has been at any point since it was made a law in 2010. That’s all thanks to the budget debate, which has shut down the federal government’s non-essential functions indefinitely.

The threat is a potential defunding of the plan, by default. Obamacare can only go into effect if it’s funded by the federal government’s budget for fiscal 2014, but with the two parties unwilling to come to an agreement on the budget, the bill is effectively dead in the water … along with many other government operations.

Sure, the Affordable Care Act falls under the budget’s compulsory funding, but that doesn’t mean it’s safe. If the money to implement it simply doesn’t exist, there’s no effective way to enforce the new law. Not unless Obamacare was to take money out of Social Security and military paychecks (which isn’t going to happen).

So, will Obamacare be undone by a budget impasse? The collective wisdom of investors might hold the answer.

Numbers Don’t Lie

What was this week’s best-performing industry group? If you guessed the healthcare sector, you’re right! Hospital stocks are up more than 7% this week alone, led by Tenet Healthcare (THC[2]) and Community Health Systems (CYH[3]).

Makes sense. Above all else, with tens of millions of newly-insured U.S. residents, more people are apt to visit a hospital, and caregivers no longer have to worry about not getting paid. If there was any industry at risk of having the rug pulled out from underneath it — especially after the 60% advance these stocks have made in the past twelve months alone — it’s the medical facilities group. However, medical facilities haven’t given up one iota of ground. Indeed, they’ve rallied despite the 11th hour roadblock put up in Washington D.C.

At the extreme other end of the spectrum are medical device makers like Medtronics (MDT[4]) and Stryker (SYK[5]).

These companies have already been crimped by Obamacare’s 2.3% excise tax (which went into effect at the beginning of this year) on certain medical devices in order to fund most of the act’s implementation. The tax reportedly costs the industry more than $2.5 billion per year, but medical device makers’ stocks are up a decent 13% since the end of 2012.

They’re still a clear laggard relative to their healthcare sector peers, however, and the group’s stocks have struggled just to break even this week despite the possibility of the burdensome tax being repealed. Why? Because it’s the one aspect of Obamacare the Democrats at least seem willing to talk about letting go.

The fact that traders aren’t interested in plowing into the long-beleaguered group even though the tax has a shot at being repealed suggests the market has little faith the measure will actually be undone. This indirectly suggests Obamacare isn’t going anywhere, since it has no other funding source, and the Democrats clearly aren’t going to repeal the entire Affordable Care Act.

In between Obamacare’s biggest winners and losers, in the middle of the spectrum, are the pharmaceutical stocks.

The law’s upside and downside for the pharma industry are something of a gray area, but broadly speaking, the Affordable Care Act tends to favor generic drug makers like Mylan (MYL[6]) and Actavis (ACT[7]), and presents something of a burden on brand-name pharma companies like Pfizer (PFE[8]) and Merck (MRK[9]).

Generic drug stocks are up more than 2% this week, and both Actavis and Mylan are at all-time highs. Meanwhile, the mainstream and higher-end drug makers are flat for the week. This isn’t the first slow week for Pfizer and Merck, though — they’ve been lethargic for a few months.

Bottom Line

Though they might not even know it, investors are collectively smarter than they realize. That collective intuition is probably on target concerning the Affordable Care Act too, and based on how traders have treated the bill’s most affected stocks, it doesn’t look like anybody really thinks Obamacare is on the chopping block.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.